Chapter 4

Chapter 4
CONSOLIDATION TECHNIQUES AND PROCEDURES

Answers to Questions
1
Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its
subsidiary investment and income accounts. Since patents and patent amortization accounts are not
recorded on the parents books, they are created for consolidated statement purposes through workpaper
entries.
Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper

adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is credited. The
noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the
credit to noncontrolling interest for noncontrolling interest share is added to the beginning noncontrolling
interest. The noncontrolling interest share is calculated based on the subsidiarys reported net income
adjusted to reflect fair value through the amortization of the excess of fair value over book value. This is
the approach illustrated throughout this text.
Workpaper procedures for the investment in subsidiary, income from subsidiary, and subsidiary equity
accounts are alike in regard to the objectives of consolidation. Regardless of the configuration of the
workpaper entries, the final result of adjustments for these items is to eliminate them through workpaper
entries. In other words, the investment in subsidiary, income from subsidiary, and the capital stock,
additional paid-in capital, retained earnings, and other stockholders equity accounts of the subsidiary never
appear in consolidated financial statements.
When the parent does not amortize fair value/book value differentials on its separate books, the parents
income from subsidiary and investment in subsidiary accounts are overstated in the year of acquisition. In
subsequent years, the income from the subsidiary, investment in subsidiary, and parents beginning retained
earnings will be overstated. The error may be corrected in the workpapers with the following entries:
Year of acquisition
Income from subsidiary
Investment in subsidiary
Subsequent year
Retained earnings parent
XXX
XXX
XXX
XXX
XXX
By entering a correcting entry, all other workpaper entries are the same as if the parent provided for
amortization on its separate books.
If the errors are not corrected through the workpaper entries suggested above, the entry to
eliminate the income from subsidiary in the year of acquisition is prepared in the usual manner without
further complications because neither the beginning investment nor retained earnings accounts are affected
by the omission. In subsequent years the entry to eliminate income from subsidiary and dividends from
subsidiary will have to be changed to correct the beginning-of-the-period retained earnings as follows:
Retained earnings parent
Dividends (subsidiary)
XXX
XXX
XXX
XXX
Workpaper adjustments are not normally entered in the general ledger of the parent or any other entity.
They are used in the preparation of consolidated financial statements for a conceptual entity for which there
are no formal accounting records. An exception occurs when the adjusting entries involve the correction of
an error. For example, if a parent does not record a dividend from a subsidiary. Then the workpaper entry
is recorded in the parents separate books.
Workpapers are tools of the accountant that facilitate the consolidation of parent and subsidiary financial
statements. Given the tools available, the accountant should select those that are most convenient in the
circumstances. If financial statements are to be consolidated, the financial statement approach is the
appropriate tool. The trial balance approach is most convenient when the data are presented in the form of a
trial balance. The accountant needs to be familiar with both approaches to perform the work as efficiently
as possible.
Workpaper adjustment and elimination entries as illustrated in this text are exactly the same when the trial
balance approach is used as when the financial statement approach is used.
The retained earnings of the parent will equal consolidated retained earnings if the equity method of
accounting has been correctly applied. In consolidating the financial statements of affiliated companies, the
beginning retained earnings of the parent are used as beginning consolidated retained earnings. If the equity
method has not been correctly applied, parent beginning retained earnings will not equal beginning
consolidated retained earnings. In this case, retained earnings of the parent are adjusted to a correct equity
basis in order to establish the correct amount of beginning consolidated retained earnings. Thus, workpaper
adjustments to beginning retained earnings of the parent are needed whenever the beginning retained
earnings of the parent do not correctly reflect the equity method.
The noncontroling interest that appears in the consolidated balance sheet can be checked by first adjusting
the equity of the subsidiary on the consolidated balance sheet date to fair value (i.e., adjusting for any
unamortized excess of fair value over book value) and then multiplying by the noncontrolling interest
percentage. Consolidated retained earnings at a balance sheet date can be checked by comparing the
amount with the parents retained earnings on the same date. If consolidated retained earnings and parent
retained earnings are not equal, either consolidated retained earnings have been computed incorrectly, or
parent retained earnings do not reflect a correct equity method of accounting.
10
Consolidated assets and liabilities are reported for all equity holdersnoncontrolling as well as controlling.
Therefore, the change in net cash from operations for a period results from noncontrolling interest share
and controlling interest share.
11
No. It relates to all interests in the consolidated entity. This difference is one of many inconsistencies in the
concepts underlying consolidated financial statements. Consider, for example, the error that could result
from dividing cash provided by operations by outstanding parent shares to compute cash flow per share.
SOLUTIONS TO EXERCISES
Solution E4-1
1
d
2
c
3
a
4
d
5
b
6
7
8
9
10
d
b
b
a
b
Solution E4-2
Preliminary computations (in thousands)
Investment cost January 2
Implied total fair value of Sal ($1,200 / 80%)
Less: Book value
Excess fair value over book value
Excess allocated to:
Inventory
Remainder to goodwill
1
$1,200
$1,500
(1,000)
$ 500
$ 50
450
$500
Income from Sal

Sals reported net income
Less: Excess allocated to inventory (sold in 2011)
Sal adjusted income
Pans 80% share
$280
(50)
$230
$184
Noncontrolling interest share

Sals adjusted income $230 20% noncontrolling interest
$ 46
Noncontrolling interest December 31

Sals equity book value
Add: Unamortized excess (Goodwill)
Sals equity fair value
20% noncontrolling interest
$1,040
450
$1,490
$ 298
Investment in Sal December 31

Investment cost January 2
Add: Income from Sal (given)*
Less: Dividends ($120 80%)
Investment in Sal December 31
* Assumes this is based on Sals adjusted income

Controlling interest share equals Parent NI under equity
method.
Consolidated net income
Investment income is given as $200,000 = $250,000 x 80%
Noncontrolling interest share is $250,000 x 20% = $50,000
$1,200
200
(192)
$1,208
$ 50
720.8
$770.8
Solution E4-3
1
$1,400,000
($600,000 + $880,000 - $80,000 intercompany)
Preliminary computations for 2 and 3

Investment cost on January 1, 2011
Implied total fair value of San ($56,000 / 70%)
Book value of San
Excess allocated entirely to Goodwill
2
$56,000
$80,000
60,000
$20,000
Pegs separate income for 2013

Loss from investment in San ($2,000 70%)
Controlling share of consolidated net income
Add: Noncontrolling share of consolidated net income
(2,000 Loss x 30%)
$48,000
(1,400)
$46,600
Investment cost January 1, 2011

Add: Share of income less dividends 2011 2013
($2,800 income - $2,000 dividends) 70%
Investment balance December 31, 2013
$56,000
(600)
$46,000
560
$56,560
Solution E4-4
Preliminary computations
Investment cost
Implied total fair value of Sin ($1,160,000 / 80%)
Book value
Total excess fair value over book value
$1,160,000
$1,450,000
1,200,000
$ 250,000

Equipment (5-year life)
Patents (10-year amortization period)
Total excess fair value over book value
$ 100,000
150,000
$ 250,000
Income from Sin

Sins reported net income
Less: Depreciation of excess allocated to equipment
Less: Amortization of patents
Sins adjusted income
Income from Sin (80%)
1
2011
$240,000
(20,000)
(15,000)
$205,000
$164,000
2012
$300,000
(20,000)
(15,000)
$265,000
$212,000
Consolidated net income for 2011

Pens net income = controlling share of consolidated net
income under equity method
Add: Noncontrolling interest share($205,000 x 20%)
$680,000
41,000
$721,000
Investment in Sin December 31, 2011

Cost January 1
Add: Income from Sin 2011
Less: Dividends from Sin 2011 ($160,000
Investment in Sin December 31
$1,160,000
164,000
(128,000)
$1,196,000
80%)
Noncontrolling interest share 2011

($205,000 adjusted income 20%)
$ 41,000
Noncontrolling interest December 31, 2012

Sins equity book value at acquisition date
Add: Income less dividends for 2011 and 2012 (see note)
Sins equity book value at December 31, 2012
Unamortized excess at December 31, 2012
Sins equity fair value at December 31, 2012
Noncontrolling interest percentage
$1,200,000
200,000
1,400,000
180,000
$1,580,000
20%
$ 316,000
Note: Sins income less dividends:

2011 Net Income
2011 Dividends
2012 Net Income
2012 Dividends
Total
Solution E4-5
$240,000
(160,000)
300,000
(180,000)
$200,000
1
2
3
4
5
c
a
b
c
d
Solution E4-6
Par Corporation and Subsidiary
Partial Consolidated Cash Flows Statement
for the year ended December 31,
Cash Flows from Operating Activities
Controlling interest share of consolidated net income
Adjustments to reconcile controlling interest
share of consolidated net income to net cash
provided by operating activities:
$100,000
Undistributed income of equity investees
(10,000)
Loss on sale of land
200,000
Depreciation expense
240,000
Patents amortization
32,000
Increase in accounts receivable
(210,000)
Increase in inventories
(90,000)
Decrease in accounts payable
(40,000)
Net cash flows from operating activities
$200,000
222,000
$422,000
Solution E4-7
Pro Corporation and Subsidiary

Partial Consolidated Cash Flows Statement
for the year ended December 31,

Cash received from customers
Dividends received from equity investees
Less: Cash paid to suppliers
Cash paid to employees
Cash paid for other operating items
Cash paid for interest expense
$645,000
14,000
$365,000
54,000
47,000
24,000
490,000
$169,000
Solutions to Problems
Solution P4-1 (in thousands of $)
Investment in Sen (75%) January 1, 2011
Implied fair value of Sen ($4,800 / 75%)
Book value of Sen
Total excess of fair value over book value
Excess allocated:
10% to inventories (sold in 2011)
40% to plant assets (use life 8 years)
50% to goodwill
Total excess of fair value over book value
1
Goodwill at December 31, 2015 (not amortized)
Noncontrolling interest share for 2015

Net income ($2,000 sales - $1,200 expenses)
Less: Amortization of excess
Plant assets ($640 / 8 yrs.)
Adjusted Sen income
25% Share
$4,800
$6,400
(4,800)
$1,600
$
160
640
800
$1,600
$
800
800
$
$
(80)
720
180
Consolidated retained earnings December 31, 2014

Equal to Peas December 31, 2014 retained earnings
Since this a trial balance, reported retained earnings
equals beginning of 2015 retained earnings.
$3,340
Consolidated retained earnings December 31, 2015

Peas retained earnings December 31, 2014
Add: Peas net income for 2015
Less: Peas dividends for 2015
Consolidated retained earnings December 31
$3,340
2,170
(1,000)
$4,510
Consolidated net income for 2015

Consolidated sales
Less: Consolidated expenses ($7,570 + $80 depreciation)
Total consolidated income
Less: Noncontrolling interest share
Controlling share of consolidated net income for 2015
$10,000
(7,650)
2,350
(180)
$ 2,170

Sens stockholders equity at book value
Unamortized excess after four years:
Inventory
Plant assets ($640 - $320)
Goodwill
Sens stockholders equity at fair value
25% Sens stockholders equity at fair value
$4,800
0
320
800
$5,920
$1,480
Solution P4-1 (continued)

7

Sens stockholders equity at book value
Unamortized excess after five years:
Inventory
Plant assets ($640 - $400)
Goodwill
Sens stockholders equity at fair value
25% Sens stockholders equity at fair value
$5,200
0
240
800
$6,240
$1,560
Solution P4-2
1
Pal Corporation and Subsidiary

Consolidation Workpapers
for the year ended December 31, 2011
(in thousands)
80%
Sal
Pal
Income Statement
Sales
Income from Sal
Cost of goods sold
Operating expenses
Consolidated NI
Noncontrol. share
($60,000 30%)
$1,240
42
800*
308*
174
Retained Earnings
Retained earnings Pal
260
Accounts payable
Other liabilities
Capital stock
Other paid-in capital
Retained earnings
260*
80*
1,060*
388*
$ 192
60
44
174
60
120*
40*
18*
174
260
b 44
174
a
c
28
12
120*
314
64
314
182
240
96
480
196
______
$1,194
60
120
80
140
242
360
176
620
120
80
600
80
a 14
b 182
_____
$ 400
72
48
200
16
$1,398
$
b 200
b 16
314
64
$1,194
$ 400
Noncontrolling interest January 1

*
$1,640
a 42
Retained earnings Sal

Controlling Share of net
income
Dividends
Balance Sheet
Cash
Receiv. net
Inventories
PP&E net
Investment in Sal
$ 400
Consolidated
Statements
c 18
Controlling share
Retained earnings
December 31
Adjustments and
Eliminations
b 78
__________ c
6
320
320
192
128
600
80
314
84
$1,398
Deduct
Workpaper entries
a To eliminate income from Sal and dividends received from Sal and adjust the
investment in Sal account to its beginning of the period balance.
b To eliminate reciprocal investment in Sal and equity amounts of Sal and to
enter beginning noncontrolling interest.
c To enter noncontrolling interest share of subsidiary income and dividends.

2

Consolidated Income Statement
(in thousands)
Sales
Less: Cost of goods sold
Gross profit
Operating expenses
Total consolidated net income
Controlling share of consolidated net income
$1,640
1,060
580
388
192
18
$ 174

Consolidated Retained Earnings Statement
Consolidated retained earnings January 1
Add: Controlling share of onsolidated net income
Less: Dividends of Pal
$260
174
(120)
$314

Consolidated Balance Sheet
at December 31, 2011
Assets
Current assets:
Cash
Receivables net
Inventories
Plant assets net
Total assets
Liabilities and Stockholders Equity

Liabilities:
Accounts payable
Other liabilities
Stockholders equity:
Capital stock, $10 par
Consolidated retained earnings
Add: Noncontrolling interest
Total liabilities and stockholders equity
$242
360
176
$192
128
$600
80
314
994
84
778
620
$1,398
320
1,078
$1,398
Solution P4-3
Pan Corporation and Subsidiary
(in thousands)
Pan
Income Statement
Sales
Income from Saf
Cost of sales
Other expenses
Consolidated Net Income
Noncontrolling share
Controlling share of NI
Retained Earnings
Retained earnings Pan
Retained earnings Saf
Dividends
Retained earnings
December 31
Balance Sheet
Cash
Accounts receivable
Dividends receivable
from Saf
Inventories
Note receivable from Pan
Land
Buildings net
Equipment net
Investment in Saf
$800
27.6
500*
194*
$200
______
$133.6
____
$ 48
100*
52*
Consolidated
Statements
$1,000
27.6
11.2
9.2
$
600*
257.2*
142.8
9.2*
133.6
360
$360
$ 68
133.6
100*
68
133.6
48
32*
a
f
24
8*
100*
$393.6
$ 84
393.6
$ 30
40
136
212
106
172
12
190
130
340
260
363.6
20
10
60
160
100
Patents
________
$1,573.6
____
$420
Accounts payable
Note payable to Saf
Dividends payable
Retained earnings
$ 20
170
10
16
1,000
300
393.6
84
$1,573.6
$420
*Deduct
Adjustments and
Eliminations
Saf 75%
12
10
210
190
500
360
b 112
a
3.6
b 360
c 11.2
100.8
$1,708.8
$
d 10
e 12
b 300
_____
550
190
4
1,000
393.6
b 120
f
1.2
550
121.2
$1,708.8

Supporting Calculations
Safs value at acquisition
Book value at December 31, 2011
Less: 2011 Net income
Add: 2011 Dividends
Book value on January 1, 2011
Fair value of patents
Safs fair value on January 1, 2011
$384
(48)
32
$368
112
$480
Purchase price (fair value) of Pans 75% share

Noncontrolling interest (25%)
$360
$120
Patents have a ten-year life, so amortization is $11,200 per year.

Safs Adjusted Income
Safs net income
Less: Amortization of Patents
Safs adjusted income
Pans 75% share
Noncontrolling interest 25% share
$ 48
(11.2)
$ 36.8
$ 27.6
$ 9.2
Solution P4-4
(in thousands)
Pal
Income Statement
Sales
Income from Sun
Cost of sales
Other expenses
Consolidated NI
Retained Earnings
Retained earnings Pal
$1,600
72
1,000*
388*
$400
284
$ 96
720
284
200*
Retained earnings Dec 31 $
804
$168
236
320
$ 60
80
Buildings net
Equipment net
Investment in Sun
260
680
520
200
284
a
c
____
$840
Accounts payable
Note payable to Sun
Dividends payable
Retained earnings
$ 40
2,000
32
600
804
$3,164
168
$840

48
16
200*
$804
24
20
296
400
420
380
1,000
720
a 24
b 720
______
$3,164
Deduct
b 136
744
Goodwill
24
96
64*
40
20
120
320
340
20
1,200*
492*
$ 308
24*
$ 284
$720
Dividends
24
380
72
200*
104*
$136
Consolidated
Statements
$2,000
Retained earnings Sun

Balance Sheet
Cash
Accounts receivable
from Sun
Inventories
Note receivable from Pal
Land
Adjustments and
Eliminations
Sun 75%
b 224
224
$3,440
$
d 20
e 24
b 600
b 240
__________ c
8
1,100
1,100
380
8
2,000
804
248
$3,440
Solution P4-4(continued)
Supporting Calculations
Suns value at acquisition:
Book value at December 31, 2011
Less: 2011 Net income
Add: 2011 Dividends
Book value on January 1, 2011
$768
(96)
64
$736
Purchase price of Pals 75% share

Implied fair value of Sun ($720 / 75%)
Suns book value
Excess allocated to Goodwill
Noncontrolling interest (25% x $960)
$720
$960
736
$224
$240
Suns Adjusted Income

Suns net income
Less: Amortization of Goodwill
Suns adjusted income
Pals 75% share
Noncontrolling interest 25% share
$96
(0)
$96
$72
$24
Solution P4-5
Allocation of excess fair value over book value
Cost of 70% interest January 1
Implied fair value of Sul ($980,000 / 70%)
Book value of Sul
Noncontrolling interest 30% of fair value at acquisition
$ 980,000
$1,400,000
(1,200,000)
$ 200,000
$ 420,000
Excess allocated
Undervalued inventory items sold in 2011
Undervalued buildings (7 year life)
Undervalued equipment (3 year life)
Trademark
Remainder to Goodwill
$ 10,000
28,000
42,000
80,000
40,000
$200,000
Calculation of income from Sul

Suls net income
Less: Undervalued inventories sold in 2011
Less: Additional Depreciation on building ($28,000/7 years)
Less: Additional Depreciation on equipment ($42,000/3 years)
Less: Trademark amortization ($80,000/40 years)
Suls adjusted income
Pars 70% controlling interest share
Noncontrolling interests 30% share
$200,000
(10,000)
(4,000)
(14,000)
(2,000)
$170,000
$119,000
$ 51,000

Workpaper entries for 2011
a
Income from Sul

Dividends (Sul)
Investment in Sul
Capital stock (Sul)

Retained earnings (Sul) January 1
Unamortized excess
Investment in Sul
d
e
f
Cost of sales (for inventory items)

Buildings net
Equipment net
Trademarks
Goodwill
Unamortized excess
119,000
1,000,000
200,000
200,000
10,000
28,000
42,000
80,000
40,000
Buildings net
4,000
Equipment net
14,000
Other expenses
Trademarks
980,000
420,000
200,000
4,000
14,000
2,000
2,000
Accounts payable
Accounts receivable
20,000
Dividends payable
28,000
Noncontrolling Interest Share

Dividends Sul
Noncontrolling Interest
51,000
70,000
49,000
20,000
28,000
30,000
21,000

(in thousands)
Par
Income Statement
Sales
Income from Sul
Cost of sales
$ 1,600
119
600*
308*
Other expenses
Consolidated NI
$1,400
800*
120*
320*
491
Retained Earnings
Retained earnings Par
600
280*
200
Dividends
491
400*
691
300
172
200
28
300
140
100
280
120
140
Balance Sheet
Cash
Accounts receivable
Inventories
Other current assets
Land
Buildings net
Trademarks
Goodwill
Unamortized excess
Accounts payable
Dividends payable
Other liabilities
Retained earnings
Deduct
51
491
600
491
a
i
70
30
400*
691
$
$
g
h
292
320
20
28
28
500
200
300
624
660
42
14
1,828
______
$1,700
691
$ 3,389
602*
542
51*
200
60
200
320
_______
$ 3,389
400
200
98
2,000
1,410*
446*
200
1,029

*
119
10
4
14
2
200
100*
1,140
Equipment net
Investment in Sul
Consolidated
Statements
$3,000
a
c
d
e
f
200
Retained earnings Sul

Net income
Adjustments and
Eliminations
Sul 70%
170
40
190
1,000
c
c
b
80
40
200
g
h
20
28
a 49
b 980
f
2
c 200
b 1,000
300
$1,700
b 420
_________ i 21
1,838
1,838
78
40
______
$4,182
$
550
212
288
2,000
691
441
$4,182
Solution P4-6
Supporting computations
Ownership percentage 13,500/15,000 shares = 90%
Investment cost (13,500 shares $30)
Implied fair value of Syn ($405,000 / 90%)
Book value of Syn
$405,000
$450,000
330,000
$120,000
Excess allocated to
Land
Remainder to patents
$ 40,000
80,000
$120,000
Income from Syn

Syns reported net income
Less: Patent amortization
Syns adjusted income
$ 48,000
(8,000)
$ 40,000
Pens share of Syns income (90%)

Noncontrolling interest share (10%)
$ 36,000
$ 4,000
Investment in Syn December 31, 2012

Cost January 1, 2011
Pens share of the change in Syns retained earnings
($84,000 - $30,000) 90%
Less: Pens share (90%) of Patent amortization for 2 years
Investment in Syn December 31
$405,000
48,600
(14,400)
$439,200

Pen Corporation and Subsidiary
(in thousands)
Pen
Income Statement
Sales
Income from Syn
Cost of sales
Other expenses
Consolidated NI
Retained Earnings
Retained earnings Pen
$ 800
36
500*
201.2*
36
160
14.4
190
36
48
600*
261.2*
138.8
4 *
134.8
68
354
68
134.8
48
32*
$
84
30
40
a
g
Buildings net
260
100
10
66
190
40
f 10
e 10
d 14.4
b 300
20
16
300
230
500
360
_____
$ 420

10
14.4
210
________
$1,569.6
388.8
$1,569.6
f
d
a
7.2
b 432
60
160
1,000
100*
388.8
20
10
130
340
170.8
10
28.8
3.2
$
439.2
Land
Deduct
134.8
100*
Note receivable Pen

Investment in Syn
$ 354
Retained earnings Dec 31 $ 388.8
Accounts payable
Note payable to Syn
Dividends payable
Capital stock
Retained earnings
100*
52*
$1,000
g
$ 134.8
Dividends
Equipment net
Patents
$ 200
Consolidated
Statements
Retained earnings Syn

Net income
Balance Sheet
Cash
Accounts receivable
Inventories
Adjustments and
Eliminations
90% Syn
72
180.8
1.6
1,000
388.8
84
$ 420
_________
562.4
64
$1,620
b
g
48
.8
562.4
48.8
$1,620
Solution P4-7
Allocation of excess fair value over book value
Cost of 70% interest January 1
Implied fair value of Sol ($490,000 / 70%)
Book value of Sol
$490,000
$700,000
(600,000)
$100,000
Excess allocated
Undervalued inventory items sold in 2011
Undervalued buildings (7 year life)
Undervalued equipment (3 year life)
5,000
14,000
21,000
60,000
$100,000
Calculation of income from Sol

Sols reported net income
Less: Undervalued inventories sold in 2011
Less: Depreciation on building ($14,000/7 years)
Less: Depreciation on equipment ($21,000/3 years)
Adjusted income from Sol
Pars 70% controlling share
30% Noncontrolling interest share
Workpaper entries for 2011
a
Income from Sol
Dividends (Sol)
Investment in Sol
b
d
e
f
Capital stock (Sol)

Retained earnings (Sol) - January 1
Unamortized excess
Investment in Sol
Noncontrolling interest - January 1
Cost of sales (for inventory items)
Buildings net
Equipment net
Goodwill
Unamortized excess
$100,000
(5,000)
(2,000)
(7,000)
$ 86,000
$ 60,200
$ 25,800
60,200
35,000
25,200
500,000
100,000
100,000
490,000
210,000
5,000
14,000
21,000
60,000
Buildings net
2,000
Equipment net
7,000
100,000
2,000
7,000
Noncontrolling Interest Share

Dividends Sol
Noncontrolling Interest
25,800
Accounts payable
Accounts receivable
10,000
Dividends payable
14,000
15,000
10,800
10,000
14,000

(in thousands)
Par
Income Statement
Sales
Income from Sol
Gain on equipment
Cost of sales
800
60.2
10
300*
155*
Other expenses
Consolidated NI
________
$ 255.2
Retained Earnings
Retained earnings Par
5
2
7
_____
$ 100
$ 100
b 100
300*
281
25.8*
255.2
300
25.8
255.2
100
50*
355.2
$ 150
96
100
14
150
70
50
140
570
Equipment net
Investment in Sol
a
f
60
70
$
g
h
156
160
10
14
14
250
100
150
312
330
21
914
a 25.2
b 490
_____
$ 850
355.2
$1,705.2
200*
355.2
100
30
100
160
________
$1,705.2
200
100
50
1,000
35
15
$
515.2

Deduct
10
705*
224*
140*
255.2
200*
Buildings net
c
d
e
60.2
300
Accounts payable
Dividends payable
Other liabilities
Retained earnings
$1,500
a
400*
60*
Consolidated
Statements
Dividends
Goodwill
Unamortized excess
$ 700
160*
Retained earnings Sol

Balance Sheet
Cash
Accounts receivable
Inventories
Land
Adjustments and
Eliminations
Sol 70%
85
20
95
500
c 60
b 100
g
h
c 100
10
14
b 500
150
$ 850
b 210
_________ f 10.8
919
919
60
______
$2,102
$
275
106
145
1,000
355.2
220.8
$2,102
Solution P4-8
Ownership percentage
13,500/15,000 shares = 90%
Investment cost (13,500 shares $15)

Implied fair value of Son ($202,500 / 90%)
Book value of Son
$202,500
$225,000
165,000
$ 60,000
Excess allocated to
Land
$ 20,000
40,000
$ 60,000
Income from Son

Puns controlling share of Sons income ($24,000
90%)
Investment in Son December 31, 2012

Cost January 1, 2011
Puns share of the change in Sons retained earnings
($42,000 - $15,000) 90%
Investment in Son December 31, 2012
Noncontrolling interest at December 31, 2012 (10% of fair value)
(($225,000 + $42,000 - $15,000) x 10%)
$ 21,600
$202,500
24,300
$226,800
$ 25,200

Pun Corporation and Subsidiary
(in thousands)
Pun
Income Statement
Sales
Income from Son
Cost of sales
Expenses
Consolidated NI
Retained Earnings
Retained earnings Pun
$ 400
21.6
250*
100.6*
71
Note receivable Pun

Investment in Son
18
80
7.2
95
Deduct
24
34
$
$
300*
126.6*
73.4
2.4*
71
181
34
71
24
16*
$
42
15
20
a
c
14.4
1.6
$
10
5
f
d
5
7.2
50*
202
33
95
105
a
7.2
b 219.6
30
80
20
40
130
50
_____
$ 210
f
5
e
5
d
7.2
b 150
85
5
500
2.4
_____
$ 792
10
500
8
150
202
$ 792
42
$ 210

*
65
170
Buildings net
$
21.6
226.8
Land
Consolidated
Statements
50*
26*
71
50*
Retained earnings Dec 31 $ 202
Accounts payable
Note payable to Son
Dividends payable
Capital stock
Retained earnings
$ 181
Dividends
Equipment net
Goodwill
$ 100
Retained earnings Son

Balance Sheet
Cash
Accounts receivable
Inventories
Adjustments and
Eliminations
90% Son
115
250
180
_________
285.2
40
818
90
.8
500
202
b
c
24.4
.8
285.2
25.2
818
Solution P4-9
Pas Corporation and Subsidiary
(in thousands)
Pas
Income Statement
Sales
Income from Sel
Cost of sales
Other expenses
Consolidated NI
Retained Earnings
Retained earnings Pas
Adjustments and
Eliminations
80% Sel
$ 400
34
160*
80*
51*
$ 220
$ 143
80*
40*
20*
$ 620
a
b
d
g
34
25
10
2.5
8.5
265*
130*
73.5*
$ 151.5
8.5*
$ 143
80
$ 150
$ 150
$ 100
Retained earnings Sel

143
80*
Dividends
Consolidated
Statements
b 100
143
80
40*
a
c
32
8
$ 140
80*
$ 213
Balance Sheet
Cash
Trade receivables net

Inventories
Land
Buildings net
Equipment net
Investment in Sel
59
56
60
80
16
80
30
130
60
60
140
400
200
a
2
b 420
g
2.5
______
$1,193
_____
$ 600
50
Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings
$ 100
20
40
300
e
f
8
16

*
Deduct
16
50
Patents
213
$1,193
140
90
270
422
80
200
100
600
119
128
10
b 300
140
$ 600
b 105
_________ c
.5
604
604
640
47.5
$1,434.5
$
172
204
140
600
213
105.5
$1,434.5

Implied fair value of Sel ($420,000 / 80%)
Book value of Sel
Excess allocated:
Undervalued inventory
Undervalued equipment
Remainder to patents
$420,000
$525,000
400,000
$125,000
$ 25,000
50,000
50,000
$125,000
Solution P4-10
Pik Corporation and Subsidiary
(in thousands)
80%
Sel
Pik
Income Statement
Sales
Income from Sel
Cost of sales
Other expenses
Consolidated NI
Retained Earnings
Retained earnings Pik
$ 400
36
160*
80*
51*
$ 220
_____
$ 145
_____
$ 80
80*
40*
20*
Adjustments and
Eliminations
Consolidated
Statements
$
a
b
d
36
25
10
9
$
265*
130*
71*
154
9*
145
150
$ 150
$ 100
Retained earnings Sel

145
80*
Dividends
$ 140
Balance Sheet
Cash

Inventories
Land
Buildings net
Equipment net
Investment in Sel
59
56
b 100
145
80
40*
a
c
60
60
140
400
200
32
8
$
60
80
16
80
30
130
620
$
e
16
80*
215
119
128
140
90
270
50
424
10
640
a
4
b 420
Goodwill
______
$1,195
_____
$ 600
50
50
$1,437
Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings
$ 100
20
40
300
e
f
8
16
80
200
100
600
215
$1,195

*
Deduct
b 300
140
$ 600
________
604
b 105
c
1
604
172
204
140
600
215
106
$1,437

Implied fair value of Sel ($420,000 / 80%)
Book value of Sel
Excess allocated:
Undervalued inventory
Undervalued equipment
Income from Sel
Sels reported net income
Less amortization of excess fair value:
Inventory
Depreciation ($50,000 / 5 years)
Sels adjusted income
Piks 80% controlling share
20% Noncontrolling interest share
$420,000
$525,000
400,000
$125,000
$ 25,000
50,000
50,000
$125,000
$ 80,000
(25,000)
(10,000)
$ 45,000
$ 36,000
$ 9,000
Solution P4-11
Investment cost December 31, 2011
Implied fair value of Stu ($170,000 / 80%)
Book value of Stu
Allocation
of Excess
$ 8,750
22,500
31,250
$62,500
Inventories
Plant assets net
Patents
$170,000
$212,500
150,000
$ 62,500
Amortization
2012 2015
$ 8,750
10,000
25,000
$43,750
Unamortized
Excess
December 31, 2015
$
--12,500
6,250
$18,750
Pil Corporation and Subsidiary

Consolidated Balance Sheet Workpapers
on December 31, 2015
Pil
Assets
Cash
Trade receivables
Advance to Stu
Inventories
Plant assets net
Investment in Stu
Patents
Unamortized excess
Total assets
Equities
Accounts payable
Dividends payable
Advance from Pil
Capital stock
Retained earnings
Noncontrolling interest
Total equities
Adjustments and
Eliminations
Stu 80%
$ 41,000
60,000
8,000
25,000
125,000
$ 35,000
55,000
300,000
175,000
c
d
e
35,000
$ 76,000
110,000
160,000
b
12,500
b
a
6,250
18,750
191,000
487,500
a 191,000
________
$750,000
________
$300,000
$ 50,000
$ 45,000
10,000
25,000
100,000
120,000
________
$300,000
400,000
300,000
________
$750,000
5,000
8,000
25,000
Consolidated
Balance Sheet
c
5,000
d
8,000
e 25,000
a 100,000
a 120,000
_________
295,500
18,750
6,250
________
$839,750
$ 90,000
2,000
47,750
295,500
400,000
300,000
47,750
$839,750
Solution P4-12
Investment cost
Implied fair value Sci ($480,000 / 80%)
Book value of Sci
$480,000
$600,000
450,000
$150,000
Allocation of differential
Plant assets
Goodwill
$100,000
50,000
$150,000
Amortization
Plant assets $100,000/4 years = $25,000 per year
Investment account balance at December 31, 2012
Underlying book value
Add: Unamortized excess allocated to plant assets
($100,000 - $50,000 depreciation)
Add: Unamortized goodwill
Fair value of Sci at December 31
Investment account balance at December 31 (80%)
Noncontrolling interest at December 31 (20%)
$580,000
The investment account balance is overstated at $560,000 for

the $16,000 dividend receivable.
50,000
50,000
$680,000
$544,000
$136,000

Pat Corporation and Subsidiary
(in thousands)
Pat
Income Statement
Sales
Income from Sci
Cost of sales
Operating expense
Consolidated NI
Retained Earnings
Retained earnings Pat
$1,800
76
1,200*
380*
$ 600
______
$ 296
_____
$ 120
12
52
164
40
160
320
680
Plant assets net

Investment in Sci
Accounts payable
Dividends payable
Other liabilities
Capital stock
Retained earnings
Deduct
Solution P4-13
25
19
100
1,500*
585*
$ 315
19*
$ 296
296
c
f
10
60
460
______
$1,988
_____
$ 720
48
32
8
180
30
40
120
200
1,400
30
20
90
400
340
$1,988
180
$ 720
244
d 100
120
40*
200*
340
40
75
560

*
76
296
200*
Dividends
Goodwill
300*
180*
Consolidated
Statements
$2,400
$ 244
Retained earnings Sci

Balance Sheet
Cash
Accounts receivable
Inventories
Advance to Sci
Land
Adjustments and
Eliminations
Sci 80%
b
d
16
50
h
g
10
16
$
h
10
40
170
380
1,190
25
b 16
c 44
d 500
g 16
50
$2,238
$
68
4
290
1,400
340
d 400
_______
827
82
82
284
d
f
125
11
827
136
$2,238
Implied fair value of Ski ($80,000 / 80%)
Book value of Ski
$ 80,000
$100,000
90,000
$ 10,000
Excess allocated to
Inventory (sold in 2011)
Equipment (4-year remaining use life)
Intangible assets (40-year amortization period)
$ 1,000
4,000
5,000
$10,000
Income from Ski for 2011

Skis net income
Less: Excess allocated to inventories
Less: Amortization of excess allocated to equipment
($4,000/4 years)
Less: Amortization of intangibles ($5,000/40 years)
Skis adjusted income for 2011
Plys 80% controlling interest share
Noncontrolling interest share for 2011 (20%)
Income from Ski for 2012
Skis net income
Less: Amortization of excess allocated to equipment
($4,000/4 years)
Less: Amortization of intangibles ($5,000/40 years)
Skis adjusted income for 2012
Plys 80% controlling interest share
Noncontrolling interest share for 2012 (20%)
$ 15,000
(1,000)
(1,000)
(125)
$ 12,875
$ 10,300
$ 2,575
$ 20,000
(1,000)
(125)
$ 18,875
$ 15,100
$ 3,775
Note: Since the prior years income is not affected by the current years
error of omission, the workpapers for 2012 are easier to prepare without
an additional conversion-to-equity entry.

Ply Corporation and Subsidiary
Ply
Income Statement
Sales
Income from Ski
Cost of sales
Operating expenses
$ 160,000
10,300
105,000*
35,000*
Consolidated NI
30,300
Retained Earnings
Retained earnings Ply
70,000
Adjustments and
Eliminations
Ski 80%
$
80,000
35,000*
30,000*
Consolidated
Statements
$ 240,000
a 10,300
b 1,000
c 1,000
d
125
141,000*
66,125*
$
Retained earnings Ski

15,000
30,000
32,875
2,575*
30,300
70,000
2,575
b 30,000
30,300
Dividends
30,300
10,000*
90,300
40,000
24,700
25,000
15,000
20,000
Balance Sheet
Cash

Inventories
15,000
5,000*
4,000
40,000
100,000
0
30,000
55,000
86,300
_________
$ 280,000
$ 120,000
Plant & equipment net

Investment in Ski
Intangibles
Accounts payable
Dividends payable
Capital stock
Retained earnings
Deduct
20,700
9,000
100,000
60,000
15,000
5,000
40,000
20,000
4,000
1,000
4,000
4,000
1,000
5,000
a 6,300
b 80,000
d
125
________
118,000
b 20,000
f 1,575
118,000
10,000*
90,300
39,700
45,000
70,000
158,000
4,875
$ 317,575
$
e 4,000
b 40,000
b 20,000
90,300
40,000
$ 280,000
$ 120,000

*
a
f
35,700
10,000
100,000
60,000
90,300
21,575
$ 317,575

Ply Corporation and Subsidiary
Ply
Income Statement
Sales
Income from Ski
Cost of sales
Operating expenses
$ 170,000
16,000
110,000*
30,000*
Consolidated NI
46,000
Retained Earnings
Retained earnings Ply
90,300
90,000
$ 260,000
a 16,000
35,000*
35,000*
20,000
40,000
46,000
15,000*
Dividends
c
d
1,000
125
3,775
145,000*
66,125*
50,000
Balance Sheet
Cash
20,000
30,000

Inventories
26,700
45,000
4,000
40,000
95,000

Investment in Ski
30,000
60,000
_________
$ 305,000
_________
$ 140,000
Accounts payable
Dividends payable
Capital stock
Retained earnings
17,700
6,000
100,000
60,000
25,000
5,000
40,000
20,000
a
f
8,000
2,000
90,300
15,000*
$ 120,400
4,000
3,000
1,000
4,875
a 8,000
b 86,300
d
125
_________
132,775
b 21,575
f 1,775
132,775
46,700
75,000
70,000
157,000
4,750
$ 353,450
$
e 4,000
b 40,000
b 20,000
121,300
50,000
$ 305,000
$ 140,000

45,100
94,300
Intangible assets
48,875
3,775*
45,100
b 40,000
20,000
10,000*
Retained earnings Dec 31 $ 121,300
Deduct
Consolidated
Statements
Retained earnings Ski

Adjustments and
Eliminations
Ski 80%
42,700
7,000
100,000
60,000
120,400
23,350
$ 353,450
Solution P4-14
Investment cost
Implied fair value of Sim ($99,000 / 90%)
Book value of Sim
$ 99,000
$110,000
80,000
$ 30,000

Inventories (sold in 2011)
Patents (10-year remaining useful life)
$ 10,000
20,000
$ 30,000
Analysis of investment in Sim account

Fair value of Sim January 5, 2011
Add: Change in retained earnings from
January 5, 2011 to December 31, 2013
Allocated to inventories and amortized in 2011
Allocated to patents and amortized over 10 years
($20,000/10 years) 3 years
Fair value at December 31, 2013
Add: Income from Sim for 2014
Less: Dividends in 2014
Fair value at December 31, 2014
$110,000
Investment in Sim on December 31, 2013 (90% fair value)

Investment in Sim on December 31, 2014 (90% fair value)
Noncontrolling interest on Dec. 31, 2013 (10% fair value)
Noncontrolling interest on Dec. 31, 2014 (10% fair value)
$129,600
$136,800
$ 14,400
$ 15,200
50,000
(10,000)
(6,000)
144,000
18,000
(10,000)
$152,000

Pep Company and Subsidiary
Pep
Adjustments and
Eliminations
Sim
Debits
Cash
$ 11,000 $ 15,000
Accounts receivable 15,000
25,000
Plant assets
220,000 180,000
Investment
in Sim
136,800
Patents
b 14,000
Cost of goods sold
50,000
30,000
Operating expenses
25,000
40,000 c 2,000
Dividends
20,000
10,000
Income
Retained
Statement Earnings
$ 26,000
40,000
400,000
a
7,200
b 129,600
c
2,000
12,000
$ 80,000*
67,000*
a
d
9,000
1,000
$ 20,000*
________
$478,000
$477,800 $300,000
Credits
Accumulated
depreciation
Liabilities
Capital stock
Paid-in-excess
Retained earnings
Sales
Income from Sim
$ 90,000 $ 50,000
80,000
30,000
100,000
60,000 b 60,000
20,000
71,600
70,000 b 70,000
100,000
90,000
16,200 ________ a 16,200
$477,800 $300,000
Noncontrolling interest Dec 31, 2013

($18,000 adj. inc. x 10%)
140,000
110,000
100,000
20,000
71,600
190,000
b
d
14,400
1,800
1,800*
$ 41,200

Noncontrolling interest Dec 31, 2014
41,200
$ 92,800
________
164,000
Balance
Sheet
d
800
164,000
92,800
15,200
$478,000
Deduct
To eliminate income from subsidiary and dividends received and reduce the
investment account to its beginning-of-the-period balance.
To eliminate reciprocal investment and subsidiary equity amounts, establish
beginning noncontrolling interest, and adjust patents for the unamortized excess
as of the beginning of the period.
To amortize excess allocated to patents for 2014.
To enter noncontrolling interest share of subsidiary income and dividends.
b
c
d
Solution P4-15
1
Journal entries on Pegs books

January 1, 2011
Investment in Sup (90%)
36,000
Cash
36,000
To record purchase of 90% of Sups stock for cash.
July 1, 2011
Investment in Ell (25%)
14,000
Cash
14,000
To record purchase of 25% of Ells stock for cash.
November 2011
Cash
5,400
5,400
To record receipt of 90% of Sups $6,000 dividends.
November 2011
Cash
2,500
2,500
To record receipt of 25% of Ells $10,000 dividends.
December 31, 2011

9,000
Income from Sup
To record Share of Sups reported income
($56,000 - $46,000) 90%
December 31, 2011
1,400
Income from Ell
To record investment income from Ell for
2011 computed as:
Share of Ells reported income
$ 1,500
($60,000-$48,000)1/2 year 25%
[$14,000 ($48,000 25%)]
10 years 1/2 year
(100)
$ 1,400
9,000
1,400

2
Pegs separate company financial statements

Peg Corporation
Income Statement
Revenues
Sales
Income from Sup
Income from Ell
Total revenue
Costs and expenses
Cost of sales
Other expenses
Total costs and expenses
Net income
$200,000
9,000
1,400
$210,400
$120,000
50,000
170,000
$ 40,400
Peg Corporation
Retained Earnings Statement
Retained earnings January 1
Add: Net income
Deduct: Dividends
Retained earnings December 31
$ 40,000
40,400
(20,000)
$ 60,400
Peg Corporation
Balance Sheet
Assets
Current assets:
Cash
Plant assets net
Investments:
$ 37,900
80,000
$ 39,600
12,900
Total assets
Liabilities and stockholders equity
Current liabilities
Capital stock
Retained earnings December 31
$117,900
240,000
52,500
$410,400
$ 50,000
$300,000
60,400
360,400
$410,400

3
Consolidation workpapers trial balance format

Peg Corporation and Subsidiary
Peg
90%
Sup
Adjustments and
Eliminations
Income
Retained
Statement Earnings
Debits
Cash
$ 37,900 $ 8,000
80,000
22,000
240,000
28,000
Plant assets net
Investment in
Sup
Investment in Ell
Cost of sales
Other expenses
Dividends
39,600
12,900
120,000
50,000
20,000
$ 45,900
102,000
268,000
a 3,600
b 36,000
12,900
32,000
14,000
6,000
$152,000*
64,000*
a
d
Total debits
$600,400 $110,000
Credits
Current liabilities
Capital stock
Retained earnings
Sales
Income from Sup
Income from Ell
Total credits
$ 50,000 $ 14,000
300,000
36,000 b 36,000
40,000
4,000 b 4,000
200,000
56,000
9,000
a 9,000
1,400 ________
$600,400 $110,000
Noncontrolling
interest - January 1
$10,000 10%
$ 20,000*
________
$428,800
$ 64,000
300,000
40,000
256,000
1,400
b
d
5,400
600*
4,000
1,000

December 31
Balance
Sheet
1,000*
$ 40,400
40,400
$ 60,400
________ d
400
50,000
50,000
60,400
4,400
$428,800

4
Consolidated financial statements

Consolidated Income Statement
Revenues
Sales
$256,000
Income from Ell (equity method)
1,400
Total revenues
Costs and expenses
Cost of sales
$152,000
Other expenses
64,000
Total costs and expenses
Total consolidated income

Consolidated Retained Earnings Statement
Consolidated retained earnings January 1
Add: Controlling share of NI
Deduct: Dividends
Assets
$257,400
216,000
41,400
1,000
$ 40,400
$ 40,000
40,400
(20,000)
$ 60,400

Consolidated Balance Sheet
Current assets:
Cash
Plant assets net
Investments and other assets:
Investment in Ell
Total assets
Liabilities and stockholders equity
Current liabilities
Capital stock
45,900
102,000
$147,900
268,000
12,900
$428,800
$ 64,000
$300,000
60,400
4,400
364,800
$428,800
Solution P4-16
Partial consolidated statement of cash flows using the direct method
Pil Corporation and Subsidiaries
Partial Consolidated Statement of Cash Flows
for the current year
$3,200,000
Dividends from equity investees
80,000
Interest received from short-term loan
10,000
Cash paid for other expenses
(900,000)
Cash paid to suppliers
(1,260,000)
Net cash flow from operating activities
$1,130,000
Solution P4-17
Direct Method
Pes Corporation and Subsidiary
Consolidated Statement of Cash Flows
Cash paid for operating expenses
Cash Flows from Investing Activities
Purchase of equipment
Net cash flows from investing activities
Cash Flows from Financing Activities
Payment of cash dividends controlling
Payment of cash dividends noncontrolling
Payment of long-term liabilities
Net cash flows from financing activities
Decrease in cash for the year
Cash on January 1
Cash on December 31
$1,340,000
$696,000
315,000
(1,011,000)
329,000
(250,000)
(250,000)
(72,000)
(4,000)
(22,000)
(98,000)
(19,000)
130,000
111,000
Reconciliation of controlling share of consolidated net income to net cash

provided by operating activities
Adjustments to reconcile controlling share of

consolidated net income to net cash
Increase in accounts payable
Increase in other current assets
$260,000
$ 10,000
102,000
1,000
44,000
(10,000)
(40,000)
(38,000)
69,000
$329,000
Solution P4-17
(continued)
Indirect Method
Pes Corporation and Subsidiary
$260,000

consolidated net income to net cash provided by
operating activities:
Depreciation
Increase in other current assets
Payment of long-term liabilities
Decrease in cash for the year
Cash on January 1
Cash on December 31
10,000
$102,000
1,000
(10,000)
(40,000)
(38,000)
44,000
(250,000)
69,000
329,000
(250,000)
(72,000)
(4,000)
(22,000)
(98,000)
(19,000)
130,000
$111,000
Note: The cash flows from investing activities and cash flows from financing
activities sections of the statement of cash flows are the same under the
direct and indirect method.
Solution P4-18 [AICPA]

Indirect Method
Puh, Inc. and Subsidiary
Statement of Cash Flows (Indirect Method)
$ 198,000

Decrease in accounts receivable
Increase in accounts and accrued payables
Increase in deferred income taxes
Gain on marketable equity securities
Gain on sale of equipment
Proceeds from sale of equipment
Cash received from sale of treasury stock
Payment on long-term note
Increase in cash for the year
Cash on January 1
Cash on December 31
33,000
82,000
3,000
22,000
121,000
12,000
(70,000)
(11,000)
(6,000)
186,000
384,000
$(127,000)
40,000
(87,000)
44,000
(58,000)
(15,000)
(150,000)
(179,000)
118,000
195,000
$ 313,000
Listing of non-cash investing and financing activities:

Issued common stock in exchange for land with a fair value of $215,000.

Indirect Method
Puh, Inc. and Subsidiary
Workpapers for the Statement of Cash Flows (Indirect Method)
Years
Change
Asset Changes
Cash
Allowance to reduce MES
Accounts receivable net
Inventories
Land*
Plant and equipment
Accumulated depreciation
Patents net
Total asset changes
Changes in Equities
Accounts & accrued payable
Note payable long-term
Deferred income taxes
Noncontrolling interest in
Sto
Common stock, $10 par*
Additional paid-in capital
Retained earnings
Treasury stock at cost
Total changes in
equities
118,000
11,000
(22,000)
70,000
215,000
65,000
(54,000)
(3,000)
e
f
k
l
m
Cash Flow
Investing
Activities
Cash Flow
Financing
Activities
11,000
22,000
62,000
82,000
3,000
g 70,000
h 215,000
j 127,000
k 28,000
400,000
121,000 n 121,000
(150,000)
12,000 p 12,000
18,000 b 33,000
100,000
123,000
140,000
36,000
h 100,000
h 115,000
i
8,000
a 198,000
i 36,000
o 150,000
d
15,000
58,000
400,000
Gain on MES
Purchase of plant and equipment
Sale of equipment
Gain on equipment
Payment on long-term note
Amortization of patents
Decrease in receivables
Increase in accounts and accrued
payables
Increase in deferred income taxes
Proceeds from treasury stock
Payment of dividends
Reconciling Items
Debit
Credit
Cash Flow
From
Operations
controlling
noncontrolling
a 198,000
b 33,000
e 11,000
j 127,000
k
40,000
82,000
m
f
3,000
22,000
6,000
198,000
33,000
(11,000)
(127,000)
40,000
(6,000)
82,000
o 150,000
(150,000)
70,000
n 121,000
p
i
c 58,000
d 15,000
1,229,000
12,000
44,000
3,000
22,000
(70,000)
121,000
12,000
44,000
(58,000)
(15,000)
1,229,000
384,000
Cash increase for the year = $384,000 $87,000 $179,000 = $118,000.

*
Non-cash item: Purchased $215,000 land through common stock issuance.
(87,000)
(179,000)
Solution P4-19
Indirect Method
Income less dividends equity investee
Cash received from long-term note
Cash on January 1
Cash on December 31
$1,000,000
80,000
400,000
20,000
34,000
(60,000)
(420,000)
54,000
1,054,000
$(1,000,000)
(1,000,000)
$
400,000
(274,000)
(40,000)
86,000
140,000
720,000
860,000

Indirect Method
Workpapers for the Statement of Cash Flows (Indirect Method)
Years
Change
Asset Changes
Cash

Inventories
Equity investments
Patents
Total asset changes
140,000
420,000
0
600,000 F
60,000 l
(20,000) h
Cash Flows
From
Operations
Cash Flows
Investing
Activities
Cash Flows
Financing
Activities
420,000
400,000 g 1,000,000
60,000 m
120,000
20,000
$1,200,000
Changes in Equities
Accounts payable
$
34,000
Dividends payable
26,000
Long-term note payable
400,000
Common stock
0
0
Retained earnings
700,000
Noncontrol. interest 20%
40,000
Changes in
equities
$1,200,000
Purchase of plant & equipment
Depreciation plant & equipment
Amortization of patents
Income less dividends from
Investees
Received cash from long-term note
Reconciling Items
Debit
Credit
i
k
j
34,000
26,000
400,000
a 1,000,000 c
b
80,000 d
300,000
40,000
a 1,000,000 $1,000,000
b
80,000
80,000
g 1,000,000
$(1,000,000)
f
h
420,000
400,000
20,000
400,000
20,000
(420,000)
120,000 l
60,000
(60,000)
i
34,000
34,000
J
400,000
0
$ 400,000
c
300,000 k
26,000
(274,000)
controlling
40,000
__
_
(40,000)
noncontrolling d
3,900,000
3,900,000 $1,054,000 $(1,000,000) $ 86,000
Cash increase for the year = $1,054,000 - $1,000,000 + $86,000 = $140,000

Direct Method
(in thousands)
Cash received from equity investees
Cash paid for other operating expenses
Cash received from long-term note
Cash on January 1
Cash on December 31
Reconciliation of controlling share of consolidated
net income to net cash provided by operating
activities
Income less dividends equity investee
$4,780
60
$ 2,866
920
(3,786)
1,054
$(1,000)
(1,000)
$
400
(274)
(40)
86
140
720
860
$1,000
80
(60)
400
20
34
(420)
54
$1,054

Direct Method
Workpapers for the Statement of Cash Flows (Direct Method)
(in thousands)
Years
Change
Asset Changes
Cash
Inventories
Equity investments
Patents
Total asset changes
Changes in Equities
Accounts payable
Dividends payable
Long-term note payable
Retained earnings*
Noncontrol.interest 20%
Changes in equities
Ret. earnings change*
Sales
Income from equity
investees
Cost of goods sold
Other operating expenses
share
Dividends declared
Pil
140
420
0
600
60
(20)
$1,200
Cash Flow
From
Operations
Cash Flow
Cash Flow
Investing
Financing
Activities Activities
a
b
400
20
34
26
400
700
40
$1,200
f
g
h
34
26
400
80
$5,200
420
120
(2,900)
(400)
(940)
60
420
c 1,000
d
60
40
$4,780
f
b
e
34
400
20
(80)
80
(300)
g
k
26
274
400
Retained earnings
______
change
$ 700
Received cash from long-term note
Payment of dividends controlling
Payment of dividends noncontrolling
Reconciling Items
Debit
Credit
k
274
j
40
c 1,000
2,754
2,754
60
(2,866)
0
(920)
0
$1,054
$(1,000)
$(1,000)
Retained earnings changes replace the retained earnings account for reconciling purposes.
Cash increase for the year = $1,054 - $1,000 + $86 = $140.
$ 400
(274)
(40)
__
$ 86

Chapter 4 - 12thEDITION

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Chapter 4 - 12thEDITION

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CONSOLIDATION TECHNIQUES AND PROCEDURES

Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper

Income from Sal

Noncontrolling interest share

Noncontrolling interest December 31

Investment in Sal December 31

Noncontrolling interest share

($600,000 + $880,000 - $80,000 intercompany)

Preliminary computations for 2 and 3

Pegs separate income for 2013

Investment cost January 1, 2011

Excess allocated to:

Income from Sin

Consolidated net income for 2011

Investment in Sin December 31, 2011

Noncontrolling interest share 2011

Noncontrolling interest December 31, 2012

Note: Sins income less dividends:

Pro Corporation and Subsidiary

Cash Flows from Operating Activities

Goodwill at December 31, 2015 (not amortized)

Noncontrolling interest share for 2015

Consolidated retained earnings December 31, 2014

Consolidated retained earnings December 31, 2015

Consolidated net income for 2015

Noncontrolling interest December 31, 2014

Solution P4-1 (continued)

Noncontrolling interest December 31, 2015

Pal Corporation and Subsidiary

Noncontrolling interest January 1

Retained earnings Sal

Solution P4-2 (continued)

Pal Corporation and Subsidiary

Pal Corporation and Subsidiary

Pal Corporation and Subsidiary

Liabilities and Stockholders Equity

Solution P4-3 (continued)

Purchase price (fair value) of Pans 75% share

Patents have a ten-year life, so amortization is $11,200 per year.

Retained earnings Dec 31 $

Noncontrolling interest January 1

Retained earnings Sun

Purchase price of Pals 75% share

Suns Adjusted Income

Calculation of income from Sul

Solution P4-5 (continued)

Income from Sul

Capital stock (Sul)

Cost of sales (for inventory items)

Noncontrolling Interest Share

Solution P4-5 (continued)

Retained earnings Dec 31 $

Noncontrolling interest January 1

Retained earnings Sul

Income from Syn

Pens share of Syns income (90%)

Investment in Syn December 31, 2012

Solution P4-6 (continued)

Noncontrolling interest January 1

Note receivable Pen

Retained earnings Dec 31 $ 388.8